Category ArchiveDonald Trump

The Bureau of Labor Statistics reported last week that the country added 200,000 jobs in January, which exceeded expectations and marked 88 straight months of job growth; the unemployment rate has remained steady at 4.1 percent for the last four months—its lowest level in 17 years; average hourly wages for private sector workers climbed 2.9 percent on the year—the strongest year-over-year shift since June 2009—and 0.2 percent from the previous month.

Historically, a strong economy has spurred strong travel and tourism numbers that boost the hospitality real estate sector—led by domestic travel and buoyed by international travel, which has been a mainstay export for the U.S. for years.

For the last two years, however, the trajectory of international travel has dipped significantly, and the U.S.’ current economic standing, coupled with its turbulent political environment, has some hospitality industry professionals and economists noticing some fractures that could negatively impact the sector.

“International tourism is definitely down,” said Chris Muoio, a senior quantitative strategist at real estate research firm Ten-X. “It’s affecting select, gateway markets disproportionately, and it’s really coming at a time when these markets have seen large expansions in supply. It’s not drastic right now, but it’s definitely having an effect.”

The U.S.’s total market share of long-haul travel fell to 11.9 percent last year, down from 12.9 percent in 2016 and from 13.6 percent in 2015, according to the U.S. Travel Association. The U.S. was joined only by Turkey—a country currently in political turmoil, having faced a military coup on July 15, 2016—as the only two countries out of the world’s top 12 destinations to have seen a significant drop in inbound international travel over the last two years—Turkey (6.7 percent) and the U.S. (6 percent). In comparison, Saudi Arabia saw its arrivals climb 20.3 percent from 2015 to 2017.

Nine of the U.S.’s top 10 source countries for international arrivals reported significant declines from 2015 to 2017—the only country whose travelers didn’t soften on the U.S. as a vacation destination was South Korea, which reported no change, according to data from the travel association. Had the U.S. maintained its market share of visitors, the hospitality sector would have had $32.3 billion in additional spending and 100,000 more jobs. In a separate report from the Commerce Department in early January, traveler spending fell 3.3 percent in 2017—through November 2017—equating to $4.6 billion in losses and 40,000 lost jobs.

“I think the damage is done,” Muoio said. “Even if the White House softens and changes its message, I think international travel sees right through it. As long as this administration is in place, I think there’s going to be a tepid, cooler response toward traveling to the U.S. It’s just become a less desirable destination based off the rhetoric and attitude that’s been put out there.”

Muoio added, “I don’t see tourism rebounding significantly unless [the U.S. dollar depreciates against other currencies]. It would honestly depend on whether [President Donald Trump] gets a second term. Four years of this attitude isn’t lasting, whereas a decade is more lasting. It’s definitely having a chilling effect on hospitality.”

Despite the losses in international travel, the hotel sector has remained steady for some time. Average daily room rates (ADR) have hit an all-time high—although it’s slowed considerably since 2014, according to data from research firm STR.

Revenue growth declined year-over-year in the first quarter of 2017 for the first time since 2010—although it was a small drop—caused by a slight dip in demand, stagnant occupancy levels and continued increases in hotel room supply across the U.S., according to an August 2017 report from Wells Fargo. Occupancy levels at a national level have been flat since 2014, hovering around 65 percent, and supply growth dipped, but the number of rooms still reached a record-high level in the second quarter of 2017, according to data from STR.

“In the last handful of months, we’ve signed up or executed on a few billion dollars in hotel deals,” said Dustin Stolly, the vice chair and co-head of Newmark Knight Frank’s debt and structured finance group for the New York tri-state region. “We’re seeing significant interest in financing hotel assets at all levels of the cycle, from fixed-rate assets that have stabilized cash flow to assets that have come out of renovations where lenders have gauged forward projections. Investors are definitely starting to look at hotels and be more active.”

In June 2017, STR reported it expected supply to outpace demand by 3 basis points on the year—3 to 2.7 percent—which could drive down room rates and create a cash flow issue should there be an economic downturn. Mike Barnello, the president and CEO of Bethesda, Maryland-based LaSalle Hotel Properties, told Commercial Real Estate Direct in June 2017, “When we get to this part of the cycle and we see the supply move up and continue to ramp and demand soften, that’s when we get more and more concerned.”

Demand from leisure travelers—heavily domestic—who book individually has climbed 37 percent while group bookings have seen tepid growth at 2 percent, according to a September 2017 U.S. lodging industry overview report from Cushman & Wakefield.

“Things are great right now, but back-to-back [down years for international travel] creates a concern that can be turned around,” said Chip Rogers, the CEO of the Asian American Hotel Owners Association. “We have a president who’s a hotelier. He could spread a message that America is open for business. International travel is the best and cleanest export that we have and creates and sustains many, many jobs in the U.S. If the message is the U.S. is the greatest place to visit, we would be very happy.”

That is exactly what Trump tried to say in front of a crowd of about 1,600 at the World Economic Forum in Davos, Switzerland, on Jan. 26, when he declared the U.S. is “open for business, and we are competitive once again,” touting the future of the U.S.’s energy and manufacturing exports. That assertion, however, doesn’t ring true in the hospitality sector.

Just a few days before the one-year anniversary of Trump’s inauguration, 10 business and trade associations—including the American Hotel and Lodging Association (AHLA), the Asian American Hotel Owners Association (AAHOA), the U.S. Travel Association as well as the U.S. Chamber of Commerce—created a travel industry group called the Visit U.S. Coalition that’s aimed at staving off and reversing the U.S.’s growing unpopularity as a tourist destination.

“We are certainly concerned about the statistics,” said Craig Kalkut, the vice president of government affairs at the AHLA, who added that his organization is also concerned about smaller hotels near national parks that could be affected by the loss of revenue from international travelers. “It’s important for the hotel industry but also the businesses that surround [and occupy] hotels and the economy overall, so it’s time to take some action. We want to head this off and turn things around as best we can. All these associations are nervous enough that they want to be involved. We want a more welcoming message for the world, and we want to turn things around.”

Some members of associations within the Visit U.S. Coalition acknowledged the negative impacts of certain policy initiatives and rhetoric from the Trump administration but also pointed to indicators such as the strong U.S. dollar as a main culprit for the downturn. The U.S. dollar is at its weakest point in almost two years, having fallen 0.07 points to 89.16 on the U.S. Dollar Currency Index as of Feb. 4—its lowest level since November 2014, after peaking from a high of 102.15 on March 3, 2017—although it still remains strong against foreign currencies.

“When we look at the last five to 10 years, international tourism has been a hockey puck,” said Patrick Denihan, a co-CEO of hotel developer Denihan Hospitality Group. “I would say that right now we have no concern [about the dip in international travel], but I do have a concern in the way the administration is dealing with immigration. Ten to 12 percent of our business is in the international market.”

Denihan added, “It would be nice if the current administration were taking a different position. How much stronger would it be? I don’t know. But, we always like to have more business if we can get it.”

The tight labor market, coupled with potential wage accelerations for hotel service employees—who are typically on the lower end of the wage scale—as well as potential tax hurdles for some markets, could also have an affect on operating costs.

“If the health of the labor market shifts and wages stagnate or contract, hotel fundamentals are the first to turn because of consumer spending,” Muoio said. “I would say the downside risks are bigger than the upside risks in terms of hotel operating. If there’s a downturn shock, this current supply overhang becomes a larger problem.”

Major indexes have taken a step back after getting off to a fast start to kick off the year, hinting that volatility has risen as strong wage figures have created some concerns about a pickup in inflation and a subsequent tightening of monetary policy. Outgoing Federal Reserve Chair Janet Yellen went so far as to question commercial real estate prices on CBS’ Sunday Morning in an interview recorded on Feb. 2, saying asset prices in general are “quite high relative to rents. Now, is that a bubble or is it too high? And there it’s very hard to tell. But it is a source of some concern that asset valuations are so high.”

It remains to be seen what could come of the hospitality sector, should an economic downturn swing into effect and domestic tourism take a hit, but one thing holds true: International tourism will not be there to help pick up the slack.

“We think this a great time to reverse this [downward travel] trend. For the first time ever, we have a hotel owner as a president,” Rogers said. “He has the largest platform of communication in the world with the ability to champion travel. He knows what it means to put more heads in beds.”

Amid a heated debate this week about reforming New York City’s archaic property tax system, Mayor Bill de Blasio unveiled an $87 billion budget for 2019 that included additional funding for public housing, a new basement legalization initiative and extra money for a new New York City Department of Buildings program meant to protect tenants from harassment.

In documents released yesterday, the city revealed that it would increase spending by $2.6 billion over this year’s budget, which was adopted by the city in June 2017. The mayor’s office declared that President Donald Trump’s federal tax legislation—which was passed in December 2017 and spelled trouble for high-tax Democratic states like New York—was the “most draconian tax law in recent history.”

“While the city is still analyzing the budgetary impacts, the facts are clear: middle- and lower-class New Yorkers will pay,” de Blasio said in a press release. “This budget continues to provide the services New Yorkers rely on, while preparing for potential hits to New York City.”

Cuts in federal funding and the decline of corporate tax rates pose a $700 million financial risk to New York City, the mayor’s press release continues. The city faces an estimated loss of $100 million annually because it lost the ability to refinance with tax-exempt bonds this Jan.1. And the Trump administration’s decision to slash corporate tax rates has hurt the value of Low Income Housing Tax Credits, which help finance hundreds of millions in affordable housing development in the city every year.

Despite the cuts, the city is launching a handful of pro-tenant initiatives. The new budget includes $5.7 million for a pilot program to help homeowners legalize basement apartments in East New York, Brooklyn. The Department of Housing Preservation & Development will offer low-cost financing to help subsidize basement conversions as part of the program, which will begin next month and require landlords to keep the newly legalized units rent stabilized. During a press conference yesterday, the mayor predicted that the program could unlock up to 5,000 basement apartments citywide.

Chhaya Community Development Corporation, a nonprofit that advocates for South Asian communities in Brooklyn, Queens and the Bronx, has pushed for a basement legalization program since 2008.

“We’ve always viewed this as kind of a straightforward, cost effective way of bringing over 100,000 units into the affordable market,” Chhaya CDC’s director, Annetta Seecharran, told Commercial Observer in a recent interview, “without investing hundreds and hundreds of millions in building new units, when you already have these new units like this that can be legalized with some administrative and code fixes in the city. Many of them are elderly homeowners who are banking on the income of basement apartments to keep their homes. It’s of tremendous benefit for keeping folks in communities they want to be in.”

The city is also injecting $7 million into the DOB budget so that inspectors can enforce a new package of anti-tenant harassment laws that protect renters from hazardous or illegal construction.

And after 15,000 public housing tenants lost heat in their apartments during a winter storm last month, the mayor made a public commitment as part of the budget to upgrade boilers in New York City Housing Authority buildings. The plan promises $200 million to replace and repair heating systems at 20 NYCHA developments, and an additional $9 million in capital funding for rapid response teams to handle boiler failures in public housing. The administration also pledged an additional $300 million in capital funding for NYCHA over the next nine years.

Five years makes a big difference. If one were to hop in a time machine and zoom back a half decade, it would almost feel like a Futurama episode of a parallel universe.

Having been hit by Superstorm Sandy, a lot of the coastal parts of New York City were in shambles, and thousands were still reeling from the devastation. President Barack Obama was gearing up to begin his second term, while Donald Trump was penning an op-ed on CNN’s website championing, “We will have to leave borders behind and go for global unity when it comes to financial stability.”

During that time, Rob Speyer, the real estate scion of Tishman Speyer, became the chairman of the Real Estate Board of New York. With his term having ended at the close of 2017, Commercial Observer took a look at his tenure over the last five years at the helm of the 122-year-old body.

2013

January—Speyer, the president and co-chief executive officer of Tishman Speyer, starts a three-year term as REBNY chairman (it is later extended for two more years). He becomes the youngest person to steer the organization. His father, Jerry, was chairman from 1986 to 1988 and oversaw the appointment of Steven Spinola as president in 1986. The younger Speyer works with Spinola until his retirement.

November—Mayor Michael Bloomberg’s administration withdraws a proposal to rezone Midtown East for taller new commercial buildings, after failing to gain support from the City Council.

January—New York City Public Advocate Bill de Blasio succeeds Bloomberg as mayor.

December—Speyer leads the search to replace Spinola as president of REBNY after his nearly 30-year run. The organization announces Consolidated Edison Vice President of Government Relations John Banks will be the next president.

2015

January—Obama signs an extension through 2020 for the Terrorism Risk Insurance Act days after Congress approves it. REBNY supports the extension of the program, which was created in 2002 following the World Trade Center terrorist attacks. It provides compensation for “certain insured losses resulting from a certified act of terrorism.”

March—Banks becomes president-elect during a transition period to replace Spinola, who will step down at the end of the year.

June—The 421a tax abatement program expires. About a week later Gov. Andrew Cuomo announces the renewal of the program for six months with the caveat that for a longer renewal REBNY and the construction unions will have to come to an agreement about prevailing wages.

September—Speyer becomes the lone CEO of Tishman Speyer after sharing the title with his father since 2008. The younger Speyer also retains the president role, while his dad, a co-founder of Tishman Speyer in 1978, keeps the title of chairman.

2016

January—Talks between REBNY and the Building and Construction Trades Council of Greater New York break down and 421a officially expires without an extension.

January—REBNY’s membership exceeds 17,000 real estate professionals, an all-time high for the then 120-year-old organization.

August—After breaking tradition and giving Speyer a fourth year as chairman in 2015, the board of governors approves Speyer for a fifth year.

October—New York State enacts legislation (supported by REBNY) that makes it illegal to advertise short-term rentals in multifamily buildings, targeting Airbnb and similar actors.

November—The construction unions and REBNY agree on a benchmark labor wage for construction workers, fulfilling the prerequisite to revive 421a.

2017

April—421a is reborn as Affordable New York after it passes in the state budget. The legislation allows a tax break for 35 years if developers of market-rate rental buildings with 300 or more units in certain neighborhoods set aside 25 to 30 percent as affordable units and pay construction workers an average hourly rate of $60 in Manhattan and $45 in Brooklyn and Queens.

June—William Rudin, the CEO and co-chairman of Rudin Management Company, is selected to succeed Speyer as the next REBNY chairman.

August—REBNY launches its newly syndicated Residential Listing Service. The long-planned RLS allows salespersons and brokers to send listings to a network of real estate listing websites through one centralized feed.

August—The City Council passes the Midtown East rezoning, which will amplify developers’ ability to construct taller commercial buildings along 78 blocks from East 39th to East 57th Streets and Third to Madison Avenues.

September—Despite heavy pushback from REBNY over a new bill that increases safety training for construction workers, the City Council votes unanimously in favor of it. In a statement, REBNY says it supports more safety training but criticizes the legislation for failing to address the trade organization’s concerns about its implementation and costs.

Recently, Congress is been discussing a tax reform plan that could have profound implications for the commercial real estate market, New York and the entire tri-state area.

There are many aspects of the reform that sound good, but what are the costs to get these benefits?

One of the benefits would be a reduction in corporate tax rates. If corporate taxes are reduced to the extent they have been proposed, profits should rise substantially allowing companies to invest and grow. This would lead to more jobs and the need for more office, retail and industrial space to be occupied by these companies, a good thing for commercial real estate.

Personal tax rates, for all but the highest earners, would go down as well. This would leave the average American with more disposable income, which could be invested or spent on goods and services.

These reductions in corporate and personal tax rates would necessitate tradeoffs. This means that several types of deductions would no longer be permitted. The deduction for state and local taxes (SALT) is a key deduction that appears to be on the chopping block. Importantly, for high-tax states, especially New York, this could be devastating.

With tax rate for the highest earners remaining essentially flat, eliminating the deduction for state and local taxes would effectively raise this group’s tax burden by 6 to 8 percent. New York has the highest tax burden of any state in America. Here, we pay about 12.7 percent in state taxes (that’s before the additional 4 percent tax paid by residents of New York City). If New York City residents moved to a zero-state-tax state like Florida, their tax burden would be reduced by 16.7 percent, a meaningful margin.

This tax increase could be enough to incentivize the highest earners among us to leave the state. I have already heard some high-income earners discussing this. And this is something I think could actually happen. It’s not like the snowflakes in Hollywood who threatened to leave the United States if Donald Trump was elected president. To my knowledge, none have actually moved out of the country yet. However, many New Yorkers in the top tax bracket already have homes in Florida, or other lower tax states, who could decide it’s time to move on. And New Jersey and Connecticut are not options as they have relatively high state taxes as well.

The tax burden in the United States is disproportionately skewed toward high-income earners. For instance, the top 20 percent of taxpayers pay 88 percent of federal taxes. Last year, this group paid approximately $1.2 trillion. The next 20 percent of taxpayers paid about $175 billion in total while the bottom 60 percent of taxpayers paid nothing. In fact, due to refundable tax credits, the bottom 60 percent received $17 billion back.

Additionally, the top 1 percent of taxpayers pays 38 percent of all federal taxes while earning 15 percent of all income.

While these are numbers for the nation, the disproportionality of the tax burden hits New York State even harder.

So what do elected officials do if SALT are no longer deductible? If they want to keep those in the state who earn the most, and consequently add the most to our state’s revenue, action must be taken. There would likely be a significantly negative impact on tax revenue received. Many state politicians have indicated that there is no Plan B if this revenue goes away. Well, it’s time for them to wake up.

Just as happens with any business, if you suspect you are going to have a hit to your revenues, you must cut expenses. But will state officials have the guts to slash spending? That is never easy, or pain free, but is often necessary. I read something last week that came from one of our top politicians in Albany stating all the “progress” that the state has made with regard to reducing the tax burden that New Yorkers face. That’s like saying, if a student studies extra hard and gets a 46 percent on their test rather than the 42 she would have gotten without the extra work, she is making progress. Progress, yes, but the grade is still an F. We still have the highest tax burden in the nation. That’s also an F.

Plan B will require some hard choices. Choices no one seems to want to think about for the moment. Let’s hope they don’t have to.

Ever since then-presidential candidate Donald Trump accused the Federal Reserve Bank and its chair, Janet Yellen, of bowing to political pressure to keep interest rates low in 2016, Wall Street forecasters have faced a whirl of uncertainty.

Yellen, who has presided over a gradual return to monetary normalcy in the wake of the Great Recession, will reach the end of her term in January, four years after former President Barack Obama appointed her.

Her fate was fodder for anxious speculation. Would Trump renominate her? Whom might he choose to succeed her? Would melodramatic midnight tweets from the East Wing roil financial markets in advance of the decision?

In light of that uncertainty, monetary policy experts were relieved by the president’s nomination of Jerome Powell this month, whom Obama nominated to the bank’s board of governors in 2011. A lawyer who has worked at investment banks and the Treasury Department, Powell would be the first non-economist to lead the Fed since G. William Miller, an appointee of Jimmy Carter who performed so poorly that he was replaced within two years on the job.

Even so, Fed-watchers are cautiously optimistic.

“I’m as shocked as anyone at the level of decorum [Trump] displayed [in choosing a nominee],” said Kenneth Kuttner, the chair of the economics department at Williams College and an expert in monetary policy. “He didn’t do these goofy things of kind of teasing people [before revealing his nomination].”

“I have to believe that [White House Economics Council Chair Gary] Cohn and [Treasury Secretary Steven] Mnuchin talked some sense into him,” Kuttner added. “‘Donald: You don’t want to mess with this stuff!’ ”

In his public comments since joining the bank, Powell has presented himself as an advocate for continuity. In a speech in June to the Economic Club of New York, Powell spoke of his commitment to gradually unwinding the Fed’s post-crisis policy response.

“The Fed has been patient in raising rates, and that patience has paid dividends,” he said at the time. “If the economy performs about as expected, I would view it as appropriate to continue to gradually raise rates.”

That vision of policy stability appeals to Kuttner. “I haven’t read anything in his speeches that would indicate he was anything less than a straight shooter,” the professor said.

But experts are more concerned with how little they know about Powell’s view of the appropriate role of monetary policy during an economic meltdown.

“If there’s another crisis, I worry he may not be as capable of handling unfamiliar situations,” said Scott Sumner, the director of the monetary policy program at George Mason University’s Mercatus Center and the author of an economic study of the Great Depression. “I’m not saying that because he’s a non-economist—economists screw up all the time. But economists have a perspective on monetary policy that is overlooked by non-economists.”

A More Proactive Central Bank
Lessons from the Great Recession nine years ago illustrate how monetary expertise can be crucial to righting a troubled economy, Sumner said. Ben Bernanke, Yellen’s predecessor, was perhaps uniquely well suited to marshal U.S. monetary policy during that crisis, two years after President George W. Bush nominated him to the post in 2005. As a professor at Princeton University, Bernanke had grown to prominence among economists as a scholar of the Great Depression and Japan’s financial crisis in the early 1990s.

In his work on Japan in particular, Bernanke provided a clear guide to his thinking as to how central banks should act during financial crises, advocating for aggressive and unambiguous steps to counter credit freezes tied to declines in growth. A more traditional view of monetary policy postulates that once baseline interest rates are near zero, it could be risky or even impossible for a central bank to encourage substantive economic expansion—as opposed to just inflation.

Scholars in Bernanke’s camp took a different view, suggesting that through other avenues—like quantitative easing or ironclad commitments to inflation targets—the Bank of Japan could have done more to push the economy back toward its growth trend.

“Bernanke was very radical in what he encouraged the Bank of Japan to do,” Kuttner said. “He proposed targeting bond pricing, setting a numerical target for the 10-year [government bond.]”

Such a target would represent the bank’s commitment, in essence, to creating whatever amount of currency was required to bring down market interest rates. Even if material economic growth did not follow immediately, some measure of inflation surely would—expanding if nothing else the nominal tally of economic activity.

Nominal gross domestic product accounting is the crucial variable that central bankers ought to study to shepherd the economy through recessions, Sumner believes. In his opinion, Bernanke’s ideas about Japan, and his moves as Fed chairman to purchase troubled mortgage bonds onto the Fed’s balance sheet, represented an important mainstream acknowledgement that central banks’ role can extend beyond its traditional interest-rate lever.

“I think if you look at his academic writing, [Bernanke] was very conscious of the need for the Fed to boost aggregate demand when we hit the lower bound” of traditional interest-rate policy, Sumner said. When the benchmark federal-funds rate reached zero, Sumner said, “a non-economist would become complacent and just think, ‘We’ve done fine.’ “

Bernanke, on the other hand, was attuned to the Fed’s power—and responsibility—to act more assertively, Sumner said. In fact, he suspects, Bernanke was probably eager to push monetary policy even further than institutional constraints and Congressional regulators allowed him to go.

“Bernanke would have liked to do more,” Sumner said. For example, unlike the European Central Bank, “the Fed never adopted a negative interest rate policy,” the professor noted, adding that despite his personal distaste for negative interest rates, the policy may have been helpful in boosting nominal GDP at the time. “I give [Bernanke] credit for nudging the Fed to be more aggressive.”

“In my years of experience, I had never seen the power of the Fed wielded by aggressively entering the open market,” Grinis said. “We had never seen [the central bank] act in any way like that before.”

It’s a line of thought that has remained appealing to Bernanke even today, three years after his departure from the central bank. In an article posted last month on his blog at the Brookings Institution, where he is now a distinguished fellow, Bernanke outlined his support for central banks targeting steadily rising prices during a recessed economy, representing a commitment to energetic monetary policy in downturns.

Yellen, who had a front-row seat to the Fed’s financial-crisis activity as the president of the San Francisco Federal Reserve Bank, has for her part sometimes delivered a more traditional view—blaming the Great Recession, in a 2010 speech, on “sophisticated financial engineering” and “lax loan standards”—a departure from Sumner, who argues that tight monetary policy was the main culprit.

But in office as chair, Yellen pursued a policy contiguous with Bernanke’s proactive stance. For example, she has used forward-looking statements and scheduled benchmarks to spur markets toward the Fed’s goals.

A Known Unknown
That narrative provides two sharp contrasts to the prospects of a Powell chairmanship. For one, Bernanke’s extensive scholarly output from his pre-Fed career in academia—dozens of papers, a macroeconomics textbook and a book of essays on U.S. monetary history—provided an effective roadmap to his thinking, indicating his penchant for a proactive monetary response. In Powell, economists confront a far less documented thinker.

“I don’t really know the guy,” Kuttner said. “All I know is what I’ve read in [Powell’s] statements at the Federal Open Market Committee.”

A more concrete concern, however, is Sumner’s suspicion that Powell may manage monetary policy less adeptly than his predecessors—neglecting to act forcefully enough in a crisis and perhaps overreacting to market-driven price changes.

Sumner noted that Miller, the failed Carter-era Fed chair, “didn’t see the need to tighten monetary policy while inflation was accelerating toward double digits,” an example that Sumner said illustrates a non-economist’s conflation of the federal funds rate with a more holistic perspective on the condition of monetary policy.

On the other hand, Sumner said, it would be a mistake to overuse monetary policy to knock down asset prices that look inflated, as Powell has suggested he would be tempted to do. During the Depression, the professor explained, the Federal Reserve used tight monetary policy to deflate what its leaders saw as a stock-market bubble. In the process, though, “they also punished Main Street quite severely,” Sumner said. “Monetary policy is a blunt instrument.”

It’s also an instrument that’s among the most important in determining the real estate business cycle.

“All you have to do is look at how [real estate investment trusts] reprice as soon as there is movement in one direction or another on policy statements [from the Fed],” Grinis said. “We are a highly levered industry. The cost of that financing is a key component.”

Wall Street and Main Street both still have some time to process the news: If confirmed, Powell, a 64-year-old Washington, D.C., native, wouldn’t move into the chair’s office until January. In the meantime, Fed-watchers appear content with a choice that could have been far more startling.

With Halloween around the corner, scary clown costumes and Donald Trump masks are selling like hotcakes at Ricky’s NYC. Meanwhile, the beauty chain is preparing to relocate its Union Square store to a more “efficient” space at 830 Broadway between East 12th and East 13th Streets as the company focuses on its core beauty business, Ricky’s NYC’s president, Michael Long, told Commercial Observer.

The chain, which launched as Ricky Love in Greenwich Village in 1989, is closing its 8,000-square-foot-plus store at 7 East 14th Streetbetween Union Square West and Fifth Avenue at the end of November, and will open in 2,600 square feet on the ground floor at Stephen Green of SL Green Realty Corp.’s 10-story residential building at 830 Broadway. The deal includes 2,000 square feet below grade for administrative support and storage, Long said.

“It’s a great neighborhood,” Long said. “We want to remain in that neighborhood. The other [store] was a bit too large for us. This size store is more efficient.”

Indeed, Ricky’s NYC at 7 East 14th Street dedicated 2,000 square feet in the back to a wig store, in “an effort to break into the wig and hair extension market,” Long said, “and it just didn’t work for us at the end.”

Inside Ricky’s NYC at 590 Broadway in Soho. Photo: Annamarie Daoud

The beauty giant will take space previously occupied by Ibiza Kids at 830 Broadway, joining comic book store Forbidden Planet at the property. Ricky’s NYC’s lease is for 10 years and the asking rent was $225 per square foot on the ground, according to Newmark Knight Frank’s Jeffrey Roseman, who represented the landlord along with NKF’s Mark Utreras.

Ricky’s NYC has closed underperforming stores like the one at 267 West 23rd Street near Eighth Avenue this year and the the outpost at 112 First Avenue near Seventh Street last year. Today the company is profitable, Long said, and he is looking for other similarly smaller sized spaces. To keep up with the challenging retail climate, the company is focusing more on product and customer service training as well as improving the look of the stores and the windows.

While Ricky’s NYC has over 30,000 stock-keeping units, or SKUs, available on its website, the 830 Broadway store will be curated with its best-selling products.

At the end of the day, Roseman said, “Retail’s not going anywhere.” He added that while e-commerce is hot, “people just don’t want to sit at home in a bathrobe,” shopping online.

Oded Nachmani of Warwick Capital Management represented Ricky’s in the deal. He didn’t immediately respond with a comment.

While many Washington, D.C., hands are skeptical that it will ever actually happen, reforming the tax code is a big priority in the Trump Administration.

What would reform look like? Nobody quite knows (hence the skepticism that the administration will pull it off).

Even so, the real estate industry is waiting anxiously to see if the results will be conducive to development and business.

With this in mind, Commercial Observer spoke to several industry honchos to get a sense of what changes the real estate industry is hoping for, and what they’re hoping to avoid should tax reform become a reality.

“I’m hoping to see depreciation schedules reduced to 20 years for both commercial and residential properties,” said Robert Knakal, the chairman of New York Investment Sales at Cushman & Wakefield.

In a column Knakal recently penned for CO, he pointed out the depreciation schedule allows owners to depreciate the value of their real estate over time—27 years for residential property and 39 years for commercial property.

“That would be beneficial to the industry, and it’s a lot more rational [than what’s been discussed],” Knakal told CO in an interview. “What’s been proposed is that depreciation schedules go to zero, and you do an expensing where you can depreciate or write off 100 percent of your investment in year one. It also disadvantages people who own existing portfolios and would make them take steps to do things that they wouldn’t ordinarily do.”

Knakal believes that allowing for full depreciation in year one would overstimulate the market.

“[Let’s say] I’ve been a passive investor, but I have a massive portfolio worth a couple billion dollars, and I haven’t bought anything in a while because I’m happy with my portfolio,” he said. “If expensing goes in and I can’t depreciate the buildings anymore, then I’m going to do a transaction just to take advantage of that depreciation. You’re going to have people swapping portfolios, then swapping them back a year later just to get the depreciation. It’s going to lead to a lot of activity that would not ordinarily occur. I think that’s unhealthy.”

“Anything that affects the interest deduction on real estate is going to be problematic,” said Mayer Greenberg, a partner at Stroock & Stroock & Lavan. “The cash flow system, that methodology, maybe works in other industries, but it won’t work for real estate, which is capital intensive, especially for long-term holders of [property]. Real estate as a long-term asset doesn’t lend itself to immediate write-off, particularly as a trade-off for repeal of the interest deduction. Long-term [asset] holders want the interest deduction to remain in place.”

Should the government change this process, there are also questions about whether expensing land will be part of the package.

“If you’re going to go to an expensing formula,” Greenberg said, “the notion that you can’t expense land would not be proper, because a major investment of a real estate asset is in land. If there is going to be expensing, then the expensing needs to include the entire investment—the land and the building.”

Greenberg is also concerned with any elimination of the “step-up in basis” rule, which allows for the income tax basis of real estate to be increased to fair market on the owner’s passing for tax purposes.

“When a person dies, the tax basis for income tax purposes of assets owned by the person is stepped up—increased—to the fair market value for as determined estate tax,” Greenberg said. “I think eliminating that income tax step-up would be harmful to investors and property owners, who would find out they’re inheriting a property that has significant built-in tax, because the values have increased on a tax-cost basis.”

The elimination of the deductibility of state and local taxes is another change being discussed, and many in the real estate industry are not happy.

“Taking away the state and local tax deductibility…would be an unfair punishment for the Democratic states, New York and California” which rely less on a standard deduction, said Leslie Himmel, a co-founder and partner at Himmel + Meringoff Properties. “We are already at a tipping point, with taxes being high. It would be a [further] tipping point for a lot of companies expanding and thinking about where they can open.”

Knakal added, “Eliminating the deductibility of state and local taxes would be highly, highly negative for the tri-state area. It’s not like people in New York could move to New Jersey or Connecticut, because those are relatively high tax states also. I think you’d have a mass exodus of high-income earners if state and local taxes were no longer deductible.”

“For people who want to trade out of an investment and don’t want to recognize gain, it allows them to trade the real property to someone who will presumably make more efficient use of it—develop it, improve it, do something,” Greenberg said. “Now, the seller can take the same money they would have had, and invest it in other real property, facilitating the property going to the best owner from an economic perspective.”

Knakal added, “I think it’s critical that 1031 exchanges remain in effect. About 70 percent of our sellers do 1031 exchanges. Unfortunately, the scorekeepers of tax reform in Washington will assume that if there were 5,000 transactions last year with 1031, then there will be the same 5,000 this year without 1031. This is a dangerous and very inaccurate assumption, because economics teaches us that any time an activity gets more expensive, you get less of that activity. If selling a property becomes more expensive, you’re going to get less selling. I think volume would be hurt very significantly if 1031s go by the boards.”

One change being discussed that Himmel would like to see is a reduction in taxes for the repatriation of foreign earnings.

“There’s an enormous amount of cash sitting in other countries,” she said. “They want to give corporations the ability to bring it back without penurious tax implications. The repatriation of cash for these large corporations, with a grandfathering of the tax implications, would help bring money back to the United States.”

Daniel Shapiro, a partner and tax department co-chair at Berdon, said he hopes to see residential condominium construction projects exempted from the percentage-of-completion accounting method.

“That’s an inequitable rule that puts a financial strain on developers,” Shapiro said in an email. “The percentage of completion method involves, as the name implies, the ongoing recognition of revenue and income related to longer-term projects. Under the method, condo developers must recognize revenue on projects that are not completed, which causes financial strain.”

But some believe that the greatest thing the federal government can do right now regarding tax reform is simply set it in stone as much as possible and eliminate the uncertainty plaguing today’s business environment.

“What real estate people hate more than almost any other industry is that every year, Congress tinkers in one way or another with the Internal Revenue Code,” said Mike Greenwald, the business entity tax practice leader and partner at Friedman.

“One year we have bonus depreciation, the next year we don’t have bonus depreciation,” Greenwald said. “One year we’ve got full expensing, the next year we’ve got tax credits instead of expensing. It becomes difficult, because if you’re building a building, you don’t have the flexibility to make changes every year as the tax incentives change. In their heart of hearts, if you ask any real estate person, what they want is certainty and stability. Tell us what the rules are, and we’ll play by the rules. Just don’t keep changing them.”

At a time when crowdfunding for real estate projects is becoming de rigueur, there’s a new competitor in the mix—and it means business. Tel Aviv-based iintoo (yes, that’s how the company name is stylized) launched its U.S. operations in May and has been busy sourcing high-yielding real estate opportunities for investors since. To date, iintoo has raised $96 million for 33 projects—primarily multifamily projects in the U.S., although it has also funded two U.K. projects. The firm differentiates itself from its peers with its hands-on approach to deals for the life of an investment, from cradle to grave.

Commercial Observer: What’s your background?

Jeff Holzmann: I was born and raised in the U.S., but I spent almost 20 years living in Israel. I moved there as a child, went to school there and spent time in the military. Many years later, when I returned to the U.S., I found myself at this very unique junction—being American but with Israeli citizenship, speaking both languages fluently and understanding both cultures.

I was the chief executive officer of a venture capital fund [Genius Technologies] for a while, but my specialty was always in tech. So, before iintoo I worked for a publicly traded internet company [IncrediMail] and started its operations in the U.S. It was a sizable operation with 120 employees, but the first branch was in my home. The office number was my home number.

How did the iintoo opportunity materialize?

Iintoo approached me about a year ago. They were looking for someone with my experience in capital markets and in senior management roles who knew the Israeli culture and could bridge the cultural gap, if you will. Iintoo has been very successful in Israel but is now branching out to the U.S. where the model is different, the competitive landscape is different and the regulatory environment is different. Things you are allowed to do in Israel [from a regulatory perspective] you aren’t allowed to do in the U.S., and vice versa.

How would you describe iintoo?

Iintoo is a REIMCO—a real estate investment management company. The average person in the U.S. throughout American history never really had access to investments in commercial-grade real estate. Sure, if you’re a wealthy guy maybe, you own your home; if you make a lot of money, maybe you own a second home as an investment. But you’re not a real estate mogul. I used to use [Donald] Trump as an example—now that he’s president it’s different—but you see his name on high-rise buildings, and you’re simply not at that level in the big leagues.

In 2012, the JOBS act changed things by allowing [crowdfunding] companies like iintoo to do general solicitation. Crowdfunding platforms take a little money from you, a little money from her and group it all together into a sizable multimillion-dollar position in properties—but that’s where the story ends for so many other firms. Iintoo takes it a step further, and that’s why we describe it as a REIMCO.

How so?

We manage the investment from start to finish and are very hands-on. For example, I ask developers [whose projects are being funded] for access to the bank account for the management company for the property. I want to know where every dollar goes. If they think that’s too harsh, that’s okay; we don’t have to work together. But I want it. And I want their social security number to do a background check. Because we provide 95 percent of the funds that they need, I can afford to require these things. Everything has to be legit, it has to be transparent and so you have to give me access like a real partner.

What kind of deals are your investors participating in?

The deals that we do are commercial grade and at least 40 units—so for example, mixed-use assets that are retail on the bottom and residential [multifamily] on the top. The risk is spread out across multiple tenants. We vet the deals, and we underwrite them. We look at everything, and we guarantee the money.

You’re guaranteeing investor returns?

God forbid, no! We’re certainly not guaranteeing returns. It’s the other side of the equation—when we meet a developer we’re guaranteeing investment in the project. And, as I said, we ask a lot from them in return.

What’s the duration of iintoo’s investments?

All of our deals are two to three years. So investors know that within that time they’ll get their money back.

Why such a short term?

We like the short term. We don’t know what’s going to happen in seven to 10 years. Markets are cyclical, it’s a lot easier to manage investments over two to three years.

How many U.S. deals do you have under your belt since May?

We have 33 deals, three of which went full cycle already. That means they made money while investors held them, and now they were sold, and the investors got paid back. Another one will sell this month. We’re currently averaging 14.5 percent returns per year, which is pretty stellar.

Has the investor appetite increased for crowdfunding opportunities?

Enormously.

What’s driving that?

The alternatives, or lack thereof. If you have some disposable income, where else can you get 15-percent-per-year-returns. This platform is not a get-rich-quick scheme; you won’t invest with iintoo and turn around next year and own all of New York City. But if you can afford to invest, this is a great alternative, and the risks are managed.

Is there a minimum investment?

Yes—$25,000—but there’s no maximum.

Which asset types won’t you touch?

We don’t do the marijuana warehouses or operations. It’s completely legal in Colorado, so you have these properties that were warehouses before and are now logistics centers that could easily be worth tons—you could triple your money by investing in them, but you could also lose all of it if Trump decides to change the legislation and enforce closures. It’s too risky an investment. We like multifamily complexes because people have to live somewhere. We stay away from Class A buildings because if there is a downturn they get hit first. We’re like Class B buildings because if there is a contraction people move back into them, and if there’s an expansion, people in Class C buildings can move up.

How do developers perceive the crowdfunding model?

We find that they love it. As I said, we have a lot of demands that we make of them, so a lot of [developers] tell us no.

They invested in the company, and they own a lot of stock in it. We’re also located in [the same] building [at 800 Third Avenue]. Meridian has unbelievable deal flow that we have access to. They did $36 billion of financing last year alone.

What’s next on the agenda?

Global expansion. The traction we’ve had in the U.S has been great. Without a doubt the challenge is now adding even more countries. Every country is different, the competitive landscape is different and the culture is different.

You have a couple of U.K. properties: Did Brexit affect your interest there?

We wanted to have offices in the U.K. when it was part of the EU. But now with Brexit it’s no longer the case. There was also its effect on the British pound. Israeli investors made a double-digit return, but when you factor in the currency conversion, they didn’t make that much. The smartest thing is to find another development in the U.K. for them to roll their funds back into. when those investments end.

As hard as it is to believe, summer is over, and we are now chugging toward the holidays and the end of the year. With this comes the very important public policy discussion that will take place around tax reform. Tax reform could be extremely good for commercial real estate or could be devastating.

The three components of tax reform that could profoundly impact commercial real estate capital markets are expensing, or being able to depreciate 100 percent of a capital investment in the year it is made; the elimination of the deductibility of interest on business debt (all businesses, but particularly commercial real estate, rely on debt); and modifications to 1031 tax-deferred exchanges.

Through the first half of 2017, we have already seen significant reductions in volume within the investment sales market in New York City. The number of properties sold is on pace for 3,756 sales—32 percent below 2014’s all-time record of 5,534 sales. The dollar volume of sales is on pace for $32.9 billion, a whopping 57 percent below the $77.1 billion of sales seen in 2015.

With the sales market suffering the way it is, the last thing we need is the modification or elimination of 1031 tax deferred exchanges. We estimate that about 70 percent of sellers purchase another asset within 180 days of selling their property, providing them with the ability to defer their capital gains tax exposure. Additionally, it is estimated by The Real Estate Roundtable in Washington, D.C., that one third of all property transfers pay some type of tax, even if a 1031 exchange is used.

In addition to deferring capital gains tax exposure, 1031 exchanges have three distinct benefits for the market and the economy: The additional capital investors are left with 1.) creates more investment—as investors typically “trade up,” purchasing a more valuable property then the one they sold—2.) creates more jobs—as new properties are purchased they’re also upgraded, creating construction jobs—and 3.) adds additional liquidity to the market.

While these are three very compelling benefits of 1031 exchange transactions, the scorekeepers of tax reform look at things differently. They make the assumption that all transactions that happened previously would happen again, just with different tax ramifications. This is a dangerous and faulty assumption. The fact is that without the tax deferral mechanism available via the 1031 exchange, many sellers simply would not sell. Economics 101 teaches us that if an activity gets more expensive, you get less of that activity. If 1031 exchanges were eliminated, the volume of sales would fall even further, creating the ability for sales brokers like me to take a year long vacation without missing very much.

If expensing is allowed, it would over-juice the market to the point where we would probably have excessive speculative construction the way we had in the early 1980s when depreciation schedules were just 15 years.

Today, depreciation schedules are 27.5 years for multifamily assets and 39 years for other commercial properties. One-hundred percent depreciation in year one would lead to construction of buildings that were not needed, bringing back the “see-through” buildings that were so plentiful in the early 80s that led to a significant crash in the early 90s. It would also significantly disadvantage owners of existing properties and would force them to make trades, or sell, to take advantage of these new expensing rules.

While this would create artificial business for sales brokers, and additional activity market wide, it is activity created based on wanting to take advantage of the rules, not based on solid decision making. The real estate industry believes that tax reform should reward you for what you have done, or would normally do, not create incentives to do stuff you wouldn’t ordinarily do. Our industry just wants to be taxed fairly, not have policy driving decision-making.

The real roundhouse punch to the industry of tax reform could be the elimination of the deductibility of interest on business debt. As stated earlier, all businesses, but especially commercial real estate, rely on debt and not being able to deduct that interest would drastically and profoundly change the underpinnings of the commercial real estate industry.

We are all waiting for granular details of the administration’s plan to modify our tax system. It would appear that most participants in the market are hoping for minor tax reform and not sweeping tax reform as the administration has pledged. Cuts in personal tax rates and corporate tax rates are good for everyone. However, the key question is, What are the trade-offs that will come at the expense of these reductions in other rates? We should have these answers within the next month or two, but the world could look a whole lot different based on what those details reveal.

It’s been just over a year since a slight majority of British voters shocked the world and chose to leave the European Union and less than eight months since Donald Trump spoke in front of his, uh, historic crowd on the National Mall at his inauguration on Jan. 20. The two populist movements sent shockwaves through financial markets, and the commercial real estate arena was astonished and dumbfounded.

Now, commercial real estate industry leaders, who’ve been operating within a flatlined system and are eager for a pulse to return to the market, probably wish they had a reason to look to Five Man Electrical Band’s 1971 track “Signs” and collectively sing, “Sign, sign, everywhere a sign, blocking out the scenery, breaking my mind. Do this, don’t do that, can’t you read the sign?”

As of now, no, they can’t—and they’ll have to save any karaoke routines for the shower. Last year, shortly after the Brexit vote and before the U.S. election, most real estate professionals Commercial Observer spoke to reported that they were in a holding pattern. The beginning of Trump’s tenure saw some measured optimism with some big leases at the beginning of the year and chatter surrounding a massive stimulus in the form of a nationwide infrastructure project, but still, the real estate community has remained in a holding pattern. Immediate and concrete signs that the uncertainty and instability sparked by the two movements is beginning to wane seems to be nothing but veiled hope—for now.

“It’s just been boring. Nothing’s really happened, and nothing really seems like it’s going to happen,” Jay Rollins, the chief executive officer and managing principal of JCR Capital, told Commercial Observer. “People are waiting for a shoe to drop because they’ve been trained. It’s like, O.K., a real estate cycle is 10 years. Something bad should happen. What is it? I don’t know. It’s out there somewhere like a boogeyman in a closet, but we don’t know. Everybody is nervous over what they don’t know. Very few people are saying they’re out and they’re done, but it’s hard to get enough conviction to [take risks]. There are no anomalies in the system that you can say will cause a screw-up.”

Not everybody shares this view: Ken McCarthy, principal economist at real estate services firm Cushman & Wakefield, doesn’t see the market as so “boring.” “From a New York office perspective, I think it’s been a pretty exciting year. If you look at the volume of new leasing, it’s very strong. If we keep this pace up through the first seven months, it’ll be one of the top two or three strongest years in the past 15 years, so there’s a pretty healthy amount of new leasing going on.”

And he’s right. As millennials flock to urban centers in gateway cities and financial services firms expand their information technology and tech development wings, demand for jobs in financial technology could lead to sustained leasing and construction in new development. That, coupled with an expansion in health care services to serve an aging Baby Boomer population, McCarthy said, could lead to a leasing uptick.

“[A possible surge in the market] will come from sustained job growth,” McCarthy said. “As long as we sustain it, people will get comfortable with it. But, we have to keep an eye on what’s going on in Washington, D.C. The policies implemented by this administration will have an impact.

“Throughout this year, there’s certainly been a significant amount of optimism, particularly in equity markets, on the expectations of deregulation, changes in tax laws, spending on infrastructure,” he added. “Those things have led to investors picking up their investments, seeing the equity markets rise. If those policies are delayed or don’t happen, then I think there may be some reassessment by investors, and I think that might affect the market as well. But, I think in terms of leasing fundamentals right now, they’re healthy, and they’re probably going to remain healthy, but Washington could play a role in determining how healthy they are.”

A lot of air left the optimists’ sails when one of the signature promises of the Trump administration—a lavish trillion-dollar infrastructure package—all but disappeared. A broad rollout of the plan in the spring stalled over the summer, and the expected $1 trillion of federal investment was slimmed down to $200 billion with another $800 billion in private and local state investment. The administration hasn’t officially given up on the plan yet (last week the administration had briefings with state and local officials about the plan, according to The Hill), but it has been sidelined by legislative skirmishes over health care, taxes, Hurricane Harvey and the myriad other problems that have dogged the White House.

“What’s driving the New York market [is] the safety,” said Herb Hirsch, who leads the Commercial Division of Berkshire Hathaway Homeservices. “I think if we can get this political situation under wraps and get the economy really moving with the tax benefits that everyone wants, I think we’ll be fine. Question is, Will that happen? That is a subject you could spend all day discussing.”

Uncertainty surrounding whether Trump’s industry-friendly policies will ever come to fruition, as well as how tax cuts and an increase in spending could raise inflation and spark an interest rate hike, has tamped down overly aggressive deals.

“I think cash flow is king right now,” said New York-based Silverback Development Founder Josh Schuster. “People just want to focus on safe opportunities that kick off the yield, that’s protected, so that they can withstand and weather any storm that’s about to approach, if any. So, each investment is being played like a hedge right now. You see fewer opportunistic deals; people are looking for more singles and doubles and less for home runs and grand slams.”

Many, including McCarthy and Rollins, agree that Brexit’s effect on the United States market, specifically New York City, was minimal, while others believe Trump’s Washington tactics and rhetoric, whether intended or improvised, may bring a positive, but bittersweet, influence on the market.

Schuster, for one, sees Trump’s boisterousness as a positive. “I like the boasting out of Trump. He’s adamant in saying, ‘I’m going to save jobs. I’m going to bring them back. I’m going to boost the economy. I’m going to bombard [Federal Reserve Chairman] Janet Yellen with a bunch of tweets until I get my message across.’ I’m not saying that I approve of it, but…looking at it as an outsider, I think, what he says and what he does is going to have more of a positive influence than a negative one.”

Rather than pass any blame on Brexit and Trump’s rise, specifically, industry leaders are focused on indicators such as jobs reports, the growth of debt funds, the pressure to raise the U.S. debt ceiling and the roles of the Federal Reserve and Yellen as the most plausible tinder that could light a fire under the market and spur more action.

In a speech on Aug. 25, during the Fed’s annual summit in Jackson Hole, Wyo., Yellen, whose term expires in February, stressed the importance of regulation, saying that the crisis “demanded action” from the institution and that its reforms had made the system “safer.” Her words go directly against Trump’s push to rollback post-crisis regulations.

“Everybody’s looking at their watches and saying, ‘O.K., it’s been 10 years: It’s time for a slight recession or depression,’ but [Yellen’s] outlook and the Fed’s outlook now is, no, that’s not necessarily the case,” Schuster explained. “Time is not what dictates a cyclical change. Policies dictate change, so the fallout of Brexit is what we need to monitor; increase in interest rates is what we need to monitor, and the U.S. debt ceiling is what we need to monitor… But right now, we need to focus on the macro policies because that’s what inspires fear, and fear is what prevents growth.”

In the United Kingdom, the initial shock of its choice to become the first country to remove itself from the EU created a significant pause as former Prime Minister David Cameron resigned almost immediately and was replaced by Theresa May, the British pound plummeted to a 31-year low—while the U.S. dollar surged—and the stock market fell sharply. In the weeks and months following the referendum, some of the country’s largest asset management firms, including Henderson Global Investors, Columbia Threadneedle Investments and Canada Life, began freezing its commercial property funds.

On March 29, May triggered Article 50of the Treaty of Lisbon, which sets out the procedure for a member state to leave the EU. It mandates that the member state first notify the EU of its withdrawal, and it requires the EU to negotiate a withdrawal agreement with that state.

“Basically every corporate boardroom is laying out Option A, Option B and Option C, depending on how the negotiations [surrounding Article 50] go,” McCarthy told CO soon after Brexit. “The EU has cruised through this with no signs of anything negative in terms of economic performance. But there is still this uncertainty around whether this could lead to other issues and more populist uprisings in other countries, leading to more pressure in the EU. So most corporations are setting up a number of different scenarios given the potential different outcomes and developing a strategy for each one.”

Right now, investors and industry leaders are focusing on the progression of Brexit negotiations as a gauge for instability.

Some, though, aren’t frightened and would rather not lie in wait. Brookfield Asset Management, a New York-based alternative lender with a strong global footprint, continues to boast strong business in London, as evidenced by its second quarter earnings report.

“The United Kingdom has continued to capture the news of the day with its Brexit negotiations,” the report reads. “Despite the headlines, virtually all of our businesses are doing well. We have a number of office buildings under construction in the city of London and leasing continues to be strong. Since Brexit, we signed a major law firm to over 200,000 square feet of space at our 100 Bishopsgate project, and we are progressing construction of a number of major residential rental projects and other office projects, which are substantially fully leased.

“The full impact of Brexit on the U.K. is still unknown, but our view continues to be that the effect will be moderate and that London will remain one of the global centers of commerce for a long while. We see no other competitive center in Europe—and globally, few cities rival it as a welcoming market for global business.”

Commercial real estate investment volumes in the U.K. rose 13 percent on the year in the second quarter, and through the first half of this year, cross border investment climbed 24 percent compared to the first half of 2016, according to data provided by brokerage Savills Studley.

“Currency balancing out and being consistent has provided a better entry point for foreign investors to move into the U.K.,” said Savills Studley Chief Economist Heidi Learner.

“We wouldn’t expect, at this juncture, a dramatic move in the currency, or at least it won’t be as dramatic as last June,” she added. “Markets have considered the probability that Brexit negotiations will not favor the U.K., but that hasn’t dissuaded investors putting their capital to work. The activity partially reflects that.”

Last month, Reuters reported that Chinese investment in U.K. commercial property, mostly channeled through Hong Kong, had reached record highs as the fall in the pound opened a door to more foreign investment.

Chinese investors poured in 3.96 billion pounds, or roughly $5.1 billion, on London commercial property in the first six months of the year, outpacing the 2.69 billion pounds ($3.49 billion) invested throughout all of 2016, according to data from CBRE real estate group.

“Asia, particularly China, had many years of strong economic growth, and they’ve built up a lot of reserves that needed to be deployed, and they began to deploy it around the world,” McCarthy said. “Investors are seeking to diversify their assets, and real estate is one they were underinvested in, so we started to see an increase in deployment of assets into real estate in the United States and London. That’s the first thing: There’s more cash available to invest, and New York and London have always been the premier locations globally. It’s not surprising that you’d see a significant increase in investment in these markets.”

In July, Business Insider reported that a fund, called First Property, backed by eight institutional investors had raised 182 million pounds with a goal to go after post-Brexit office properties and business parks around the country. First Property CEO Ben Habib told BI, “The U.K.’s decision to leave the EU has created opportunities on which we, as a niche fund manager, are well placed to capitalize.”

The uncertainty may not scare some foreign and domestic players, who are at home, navigating London’s commercial real estate market, but the instability has many racing stateside, searching for opportunity, including at Schuster’s Silverback Development.

“Weekly, [at Silverback] we’re meeting new faces and learning new names of people from groups that want to move capital from, say, a London-based housing developers to New York-based ones,” Schuster said. “So, we’re luring a new capital that wasn’t necessarily there a year ago. I think the next two months are going to be critical in seeing what happens because we’re going to see both the U.S. debt ceiling issue unfold and the rate hike maybe by the end of October.”

It’s abundantly clear that this fall is going to be critical for policymakers as they navigate through the politics jungle. Market players who are watching from a distance can only sit back, hold fast and wait for a clear sign to fully re-engage the market.